The challenges of monitoring supplier labor practices

That is the title of a recent Atlantic article which discusses what Patagonia learned when it audited the practices of its second-tier suppliers. These are not the firms sewing sweaters or assembling backpacks. Rather these are the mills producing fabric and factories producing components that go into those sweaters and backpacks. It turns out that a lot of those mills were engaged in some dubious practices.

About one-quarter of those mills are based in Taiwan, and the majority were found to have instances of trafficking and exploitation.

The problems stemmed from how those mills found the people to work their factory lines. They didn’t hire workers themselves and instead turned to so-called labor brokers. These labor brokers charged migrants exorbitant, often illegally high fees in exchange for jobs. There were other red flags, too. Suppliers would open bank accounts into which the workers deposited their paychecks, so that fees for labor brokers could be automatically deducted. Workers’ movements were also restricted through the confiscation of passports. The recruitment and hiring process used by many labor brokers can create a cycle of fear and debt that leaves workers neither able to leave their jobs nor to make a decent living.

The article goes on to explain that sourcing labor through brokers is both legal and common in Taiwan. It is arguably necessary for the mills to be cost-competitive. Still it is an embarrassment for a brand such as Patagonia which has staked quite a bit on being a better global citizen than the typical clothing brand. (Check out the social responsibility page on their website.)

Indeed, the fact that Patagonia discovered these problems in its supply chain suggests that they likely occur in everyone’s supply chain. Patagonia is generally acknowledged as being on the cutting edge of managing the environmental and social impact of its supply chain. The question then is how the problems arose and what can be done about them.

The answer to the first question comes down to complexity and costs. The latter is an obvious concern. Fashion in general is a tough business and firms — especially those up the supply chain that are potentially small and undifferentiated — are going to have low margins. Consequently there is always going to be pressure to cut corners. That pressure will be particularly acute when downstream firms are unwilling to pony up a premium to cover the extra expense of a being a good citizen. A Taiwanese mill could forego dealing with labor brokers to assure its supply chain partners that this labor practices were all above-board but that is not a winning strategy in the long run unless the downstream firms are willing to compensate for the extra cost it has taken on.

Complexity is also a legitimate issue. Patagonia is reliant on 175 second-tier suppliers. That’s a lot of firms to be auditing on a regular basis. (To put some perspective on that number, Patagonia has trimmed its first tier from 108 to 75 in recent years in part to better monitor that part of its supply chain.) It is not clear that Patagonia could easily trim down this list of suppliers. For one, they are not interchangeable; a textile mill cannot easily turn out backpack components. Further, there are likely serious risk-management benefits from having some redundancy in the supply chain. Lead times for fabric can be really long and having some flexibility to move demand across different suppliers could well be the difference between having enough goods for the season and not.

So what can be done? The article suggests that brands should be offering longer contracts — effectively arguing that if brands make more a commitment they can demand more from suppliers. Alternatively one can argue that with more business at stake, suppliers should be more proactive in trying to eliminate problems that may cost them a large book of business. There is clearly sense in that argument but there is also the question of how large a brand’s business is relative to a supplier. If a brand is rounding error on a supplier’s overall business, the length of the commitment will likely have a negligible impact on the supplier’s behavior.

Those brands must collaborate with each other, given that many of them share suppliers. Doing so would avoid redundancies that waste time and money: In 2006 I visited a factory in Bangkok that had three fire extinguishers on a wall at different heights to conform to different brands’ codes. Consolidating codes, sharing audits, and splitting the costs of upgrades are among the aims of two initiatives that arose in the wake of Rana Plaza, the Alliance for Bangladesh Worker Safety and the Bangladesh Accord on Fire and Building Safety. And yet, there are two of them, which suggests that not everyone is ready to work together.

There are, of course, limits to how much coordinating standards and co-audits can accomplish if only because at some point too much private information is at risk of being exposed. That Patagonia buys from a particular mill may be well-known. Exactly how much they order or how they want the material finished, however, is a little more private. Brands have legitimate reasons to worry about sharing too much if they get to cosy with competitors in monitoring suppliers.